Here's what's pushing Apple to $1 trillion

It’s worth noting that as Apple (AAPL) holds its Worldwide Developers Conference (WWDC) this week, (the annual confab where it announces new software and features), Apple’s stock has hit a new all-time high.

With AAPL closing at $190.24 on Friday, Apple’s market capitalization now stands right around $940 billion, as the company marches seemingly inexorably to become the first to reach a $1 trillion market cap. (More on that clunky ‘seemingly inexorably’ in a minute.) To get to a trillion, the stock will need to hit about $197.32.*

Apple has outperformed this year, confounding those who rightfully point out that the so-called “tyranny of large numbers” makes above-trend growth ever tougher. Year to date, the stock has climbed 10.4%, running circles around the S&P 500, up a mere 1.7%.

Of course Apple has so many advantages it’s almost folly to enumerate them all. Here are a few: It has some of the most ubiquitous and high-margin consumer products in the history of humankind. It has almost unequaled brand equity. It has $130 billion in current assets, much of it cash. And in Tim Cook, it has a proven and respected CEO (I wrote about Cook’s acumen in my last piece about Apple six months ago), as well as highly-regarded senior management.

Radical incrementalism, services and smaller products

It’s worth delving into the company’s products and services a bit which is ultimately what drives the stock price. Analysts and investors have expressed concern for years now about the company’s inability to create revolutionary new products like the iPhone and iPad, never mind that this is the tallest of orders.

But a funny thing happened while the world waited for Apple’s next “insanely great” product. It has figured out how to make some serious hay in other ways. The company is now thriving through radical incrementalism, services and some smaller products.

By incrementalism, of course, I’m referring to the ever-evolving iPhone. In 2007 when the iPhone was launched, the company sold 1.4 million units; last year it sold 216 million. It has now sold a staggering total of one billion units to date. And of course the average selling price has been climbing, up $100 alone over the past year to $795.

Its services business—a Tim Cook favorite—which includes the App store, iTunes Apple Music, Apple Pay and more, saw revenue climb 31% to $9.2 billion last quarter, making it Apple’s second biggest business after iPhone, and bigger than its Mac business. Services has some major momentum going forward, I am told. If services was an independent company, it would rank number 85 on the Fortune 500, right above American Express—except that Apple’s services business is growing much, much faster than AmEx.

As for smaller products, let’s talk about the Apple Watch and yes, Air Pods. First, the watch. Sure, the watch ramped up slowly, but the business is accelerating with eight million units sold last quarter.

If you think the Apple Watch is a ho-hum product, just ask the folks at Piaget, Patek Philippe or Fitbit for that matter if they take it seriously. Apple is trying to completely disrupt a business that’s, well, almost as old as time, including the entire spectrum of time pieces, from luxury high fashion to sports watches to wearables. (Anyone for the $17,000 rose gold edition?) Luxury watches alone is a $60 billion business, so in this is a huge opportunity. Question: What’s a bigger status symbol today, an Apple Watch or a Rolex? Before you answer that, remember you couldn’t even ask the question a few years ago. Apple Watch was introduced in April 2015.

As for Air Pods, they’re classic Apple, right? High margin, high demand and groundbreaking. At $159 a pop, Apple will sell in excess of 25 million of these babies this year. KGI analyst Ming-Chi Kuo has called Air Pods Apple’s “most important accessory product.” Apple didn’t invent wireless headphones, of course, but it now makes the best. They are elegant, intuitive and produce great sound. And they will be improved.

‘Seemingly inexorably’

“It’s likely that sometime in the near future, a rare and–most would say–wonderful thing will happen over at the Washington Post Co. The company’s stock price will hit $1,000 a share. Yup, the Post has never split its stock, and one share of WPO now fetches $924.”

You’re probably going to guess what happened. That’s right, the stock never hit $1,000. Never, ever. Graham ended up selling the Post to Jeff Bezos in 2013. The stock last traded for $660. I mentioned this article to Graham some years and he groaned (he didn’t like the story at the time either), saying essentially—half kiddingly—that I had jinxed the stock from hitting $1,000.

So when will Apple become the world’s first trillion dollar company? I have no idea. And of course it may never happen.

*For these calculations, I used the 5.068 billion diluted shares outstanding number from Apple’s most recent quarterly financials.